Interactions between bacterial hosts and their viruses (phages) lead to reciprocal genome evolution through a dynamic co-evolutionary process. Phage-mediated transfer of host genes--often located in genome islands--has had a major impact on microbial evolution. Furthermore, phage genomes have clearly been shaped by the acquisition of genes from their hosts. Here we investigate whole-genome expression of a host and phage, the marine cyanobacterium Prochlorococcus MED4 and the T7-like cyanophage P-SSP7, during lytic infection, to gain insight into these co-evolutionary processes. Although most of the phage genome was linearly transcribed over the course of infection, four phage-encoded bacterial metabolism genes formed part of the same expression cluster, even though they are physically separated on the genome. These genes--encoding photosystem II D1 (psbA), high-light inducible protein (hli), transaldolase (talC) and ribonucleotide reductase (nrd)--are transcribed together with phage DNA replication genes and seem to make up a functional unit involved in energy and deoxynucleotide production for phage replication in resource-poor oceans. Also unique to this system was the upregulation of numerous genes in the host during infection. These may be host stress response genes and/or genes induced by the phage. Many of these host genes are located in genome islands and have homologues in cyanophage genomes. We hypothesize that phage have evolved to use upregulated host genes, leading to their stable incorporation into phage genomes and their subsequent transfer back to hosts in genome islands. Thus activation of host genes during infection may be directing the co-evolution of gene content in both host and phage genomes.